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Source : IW Committee, JBIMS

1) Background of the Industry

Manufacturing process of Cement:

Porttland cements are made by grinding a mixture of limestone, clay and other corrective materials, viz. Laterite, Bauxite,etc. Essential constituents mainly are Lime, Silica, Alumina and Iron Oxide. The process of manufacturing consists of grinding of raw materials into fine powder, mixing them intimately and burning in a kiln at about 1400 deg. C. The resultant product is called Clinker. Clinker is cooled, ground to fine powder with gypsum. The end product is cement.

Cement Manufacturing Process

2) Industry overview:

India is the world’s second largest producer of cement after China with industry capacity of 280 mnT. Indian cement industry comprises of 150 large cement plants with an installed capacity of 250 mnT and more than 370 operating mini-cement plants, with an estimated capacity of 25 mnT per annum, making a total installed capacity of 275 mnT. The cement industry is expected to add ~30 mnT capacity over the period of next two years (FY11-FY13E).
The Indian Cement sector as a whole, which is overweighed by the southern region, reeling under massive capacity addition coupled with sluggish growth in demand. Over supply will propel cement companies to maintain the prices lower in future leading to significant decline in EBIDTA per tonne.

Cement demand is mainly dependent on GDP Growth

Demand for cement can be determined from the country’s economic performance, with demand averaging 1.2x of GDP growth. Cement consumption has strong co-relation with economic growth and industrial activity. Cement demand is particularly linked to housing construction and infrastructure activities. We believe that growth in cement consumption will significantly increase over next two to three years as the key drivers like infrastructure, rural and urban housing sector pick up. We expect the demand to grow at 9.5%-10.5% over next two years (FY12E-13E), which is lower than 1.2x of GDP. We expect FY11E to be an unexciting year where the sharp decline in demand in 9 months will impact overall growth for FY11E. Hence, whilst the 1.2x factor would suggest 11% growth in cement demand in FY11E (1.25 x GDP growths of 8.8%), actual growth is likely to be closer to 8.5%.

The upcoming assembly elections in four states Tamil Nadu, West Bengal, UP and Gujarat in next 1-2 years, will be the key demand driver accounting for more than 30% of total consumption. We believe political parties in these states will certainly focus on key infrastructure development activities in order to attract the vote bank, which will result in significant improvement in demand.

Low per capita consumption provides upside potential:

India’s low cement consumption of ~180 kg/capita provides plenty of upside potential when compared to the major economies across the world. China’s consumption is almost five times higher than India’s and India is well behind the world average consumption of 430kg/capita.

Potential demand from the rural housing is dependent on monsoons (because the annual income of rural person is dependent on agriculture and in turn agriculture is dependent on monsoons), we except rural housing demand to remain robust. The higher interest rates and liquidity crisis, high property prices will have an impact on urban housing demand. The overall demand drivers of the sectors like Government spending and industry expansion is all set to improve. We remain positive on regions like east, central and north. The lower capacity utilisation may lead to increase in other income as companies may use their excess captive power for selling on merchant basis. That in turn would provide support to the bottom line.

The major demand driver of the cement

Housing sector


Rural housing


Urban housing


Infrastructure (Roads, Bridges


Industry spending (Govt and Private)


Infrastructure sector to drive the next phase of cement demand:

The infrastructure spending of US$514bn set aside for the 11th Five Year Plan (FYP) period (FY08-12) is 1.4x that of the 10th five year plan. We expect the 12th five year plan (FY13-17) to continue with the current momentum and result in GFCF growth at ~9.8% resulting in total infra spending doubling to US$1trillion. Furthermore, historically the last two years of various FYPs have accounted for ~50% of the total plan expenditure. Therefore, we expect infrastructure’s share of cement demand to expand significantly.


Over supply situation inevitable

In FY94 the India’s cement capacity was at 71.2 mnT and went up 275 mnT in 9MFY11. Even after considering the probable delays, industry is expected to add 30 mnT over the period of next two years to 310 mnT in FY13E. Thus, over supply situation continue to prevail till FY13E. Low capacity addition beyond FY13 will certainly minimize the supply glut and hence improve profitability.